Melbourne Institute Seminar Series

Title: Dynamics in the Liability of Foreignness: The Roles of Experience and R&D Investment

Abstract: Research demonstrates that multinational corporations (MNCs) are at a cost-based disadvantage when operating in foreign countries. This disadvantage is referred to, generically, as the liability of foreignness. Although the liability of foreignness is well documented, we understand less about whether the costs associated with it are static or dynamic, and to what extent MNCs can overcome it. In this study, we examine changes in the liability of foreignness and demonstrate that experience and R&D investment can help alleviate it. Empirically, we compare foreign manufacturing plants with home country plants of the same vintage, owned by the same parent firm. We find that the initial productivity of foreign plants is lower than that of similar domestic plants. The productivity experience curve, however, is steeper for foreign plants relative to home country plants, narrowing the initial performance gap. In addition, we verify the role of R&D, showing that distinctive patterns of R&D investment in the foreign country can diminish productivity disparities between foreign and domestic plants. These findings suggest that the disadvantages that foreign firms face are not immutable; rather, with experience and R&D investments, MNCs can achieve some degree of performance parity.